As the festival of Dhanteras approaches, the demand for gold has surged, particularly in the form of Exchange Traded Funds (ETFs). Recent reports indicate that inflows into gold ETFs have skyrocketed by nearly 88% since the beginning of this calendar year. This trend reflects enhanced liquidity, greater transparency, and alignment with global pricing, all of which are drawing more investors to these funds.
Gold ETFs have seen an impressive rise in Assets Under Management (AUM), growing over seven-fold in the last five years—from ₹5,613.22 crore in September 2019 to an astounding ₹39,823.50 crore in September 2024. This growth can be attributed to various factors that make gold ETFs an attractive investment option. In September 2024 alone, inflows reached ₹1,232.99 crore, up from ₹657.46 crore in January of the same year.
According to ICRA Analytics, the increasing popularity of gold ETFs can be attributed to their liquidity, transparency, and alignment with global gold prices. The numbers speak volumes: inflows into gold ETFs surged by a remarkable 2,695% from ₹44.11 crore in September 2019 to ₹1,232.99 crore in September 2024.
The current geopolitical tensions have also heightened the “safe-haven” appeal of gold. Investors are increasingly opting for gold ETFs over physical gold to avoid the hassle of storage and the risks associated with purity and theft.
Ashwini Kumar, Senior Vice President and Head of Market Data at ICRA Analytics, highlights the advantages of investing in gold ETFs. He states, “Investors favour investing in Gold ETFs due to liquidity, transparency, cost-effectiveness, and ease of trading compared to physical gold. The heightened activity in these funds is also driven by the prospects of an interest rate cut by the US Federal Reserve in the coming months.”
The Indian market currently offers around 17 gold ETF schemes. The average returns for these schemes have been impressive, with one-year returns at approximately 29.12%, while three-year and five-year returns stand at 16.93% and 13.59%, respectively. Among these, the LIC MF Gold ETF has performed notably well, offering returns of 29.97% for one year, 17.47% for three years, and 13.87% for five years.
In comparison, physical gold has yielded slightly better average returns: 30.13% for one year, 18.03% for three years, and 14.88% for five years.
India is the second-largest gold consumer in the world, trailing only China. With the government’s import duty cut in July 2024, expectations for increased gold demand during the festive season have been high. However, there are concerns that rising gold prices could dampen investor sentiment by constraining the spending power of potential buyers.
Investing in physical gold comes with its challenges, such as storage issues, risks of theft, and concerns about purity, which can ultimately impact returns. In contrast, gold ETFs are perceived as safer investments, governed by stringent regulations and traded in real-time on exchanges.
Kumar advises that investors with a short to medium-term investment horizon may find gold ETFs appealing. He suggests that adopting a “buy on dips” strategy can help investors take advantage of temporary price corrections. Given the current market dynamics, where equity trends are mixed, a modest allocation to gold may serve as a hedge against inflation and market volatility, helping to balance risks effectively.
In conclusion, as Dhanteras 2024 approaches, the remarkable growth in gold ETFs reflects changing investor preferences towards more secure and liquid investment options. With the festive season bringing heightened demand for gold, the trend toward ETFs is likely to continue.
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